Unless you have been living under a rock you know that the United States is now officially in a recession. But, as 2008 is drawing to a close and as 2009 promises to start off, and most likely remain, in a recession we need to look at how this will affect you, the average person. And, as we look ahead, it is important to know how a recession differs from a depression.
A recession is a period of reduced economic activity. The standard definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. Since we don’t know if a quarter is in decline until after it is over we often find that we have already been in a recession long before any official recession announcement is made. This also means that a recession that has lasted less than 10 months may go undetected.
There has to be a downward trend before anyone starts to talk about a recession. And a recession—like many things in the economy—is cyclical. For example: something happens to scare consumers—the stock market may drop or, as we have recently seen, housing prices fall. Consumers get scared and stop spending money. People stop spending money and companies need to make fewer products. When companies need to make fewer products they cut jobs, people become unemployed, and they spend even less. But the less people spend, the more jobs are lost. The more jobs are, lost the more competition there is for jobs and the less a company has to pay to employ talented people. With people making less money, they spend less money—a horrible cycle.
Recently, a lot of people lost their retirement money because of the poor performance of the stock market. These people will not be retiring when they had planned and those jobs will not open up. But, you still have people growing up and/or graduating and looking for their first job. So, not only are companies hiring less and cutting more jobs, but people who would typically be leaving the work force are not. This creates an even greater demand for jobs and a much higher unemployment rate.
For the average person the most valuable thing they own is their home. But, housing prices are down. Your house may not be worth nearly as much as it was just a few years ago.
How can you survive a recession?
Have a good job and do whatever you can to keep it. I’m not saying put up with abysmally horrid conditions but don’t assume you can easily find more work. If you do have a job, start saving. Having an emergency fund can make a load of difference if you do lose your job—even if you remain employed an emergency fund can relieve tons of stress. The key to growing an emergency fund is easy: save money! Make a budget and stick to it. A recession is not the time for buying items you do not need. An emergency fund should be three to six months worth of living expenses.
What is a depression?
A depression is a recession that lasts longer and has a larger decline in business activity. If the GDP declines by more than 10% we may be sliding into a depression.
You may hear people comparing the recession we are in now to the Great Depression of the 1930s—the last real depression in the United States. However, we are not, currently, in a depression. The worst recession in recent history was from November 1973 to March 1975, where real GDP fell by 4.9%. But it is not likely that we will ever see anything like the Great Depression again. The government’s bailout plans are all being put into place to avoid it.
